Linda Whitmore-Smithers of Medicine Hill Farm, a small, diversified farm in Starks, Maine, says she’s not an expert on insurance. She learned a lot about the subject, however, when her barn burnt to the ground, and she shared that information at the Farmer to Farmer Conference in Bar Harbor last November. Greg Warren of Warren Associates in Bucksport, Maine, a representative of the Farm Family insurance company, joined her.

Whitmore-Smithers and her husband had a three-floor chicken barn on their property. They remodeled part of it to become “the Y2K condo” where their kids, grandchildren and others could stay. The rest was used to store farm equipment and personal possessions; and a commercial kitchen was installed.

She was homesteading and was not farming commercially at that time. When State Farm Insurance visited the site and quoted a premium, “My god!” said Whitmore-Smithers about the price. “I paid the premium for the structure” but she was not adequately insured for personal property. “Big mistake,” she said.

Then she started raising cows for organic, grass-fed beef after learning about the topic at a Farmer to Farmer Conference. She dutifully called her insurance company and was told that this was not a problem as long as she wasn’t selling farm products yet.

The barn burnt to the ground while Whitmore-Smithers was at a master gardener’s class and her husband was traveling. An insurance agent and fire marshal visited the next day. No definite cause of the fire was found; it was presumed to be electrical.

Whitmore-Smithers said she was in a state of “high emotion. All I wanted to do was make everything better. Don’t make decisions in this state,” she warned.

Claims vs. Sales

The claims (not sales) agent came regarding the structure. “Sometimes claims and sales aren’t on the same page,” said Whitmore-Smithers. “For some companies, claims and sales use different [computer] programs to plug numbers into. Ask [about] this when getting insurance.” The program her claims agent used gave “quite a bit less than I was paying on the face value of the premium … I was paying a much bigger premium than I needed to pay, because the program was different. Claims said if I could account for every penny spent on construction and showed that I couldn’t finish without [that amount], then there would be a discussion.” But given the emotion involved at the time, Whitmore-Smithers and her husband decided not to pursue that discussion.

The company quickly paid the cleanup bill – unlike the experience of a neighbor who had to get a lawyer and spend a year getting cleanup money from an insurance company. “Find out who you have and what’s their track record,” Whitmore-Smithers recommended. “Find someone who had a claim with them and how it was handled.”

Most people are underinsured for personal property, Whitmore-Smithers believes, “because you don’t know what you have until you lose it.” She says also to understand the difference between replacement costs and actual cash value. For a tractor, for example, the cash value is what you paid for it, minus depreciation.

For her personal property, she had to make a list and use the Internet to find its value. “The research is a pain” after the fact. She recommends listing what you have before a catastrophe strikes. “We had pictures of some stuff,” she noted. “I think [the insurance company] knew I was underinsured and it would be easy to max out on my personal property. They were only going to give me so much.” Thus, the company was not too fussy about her documentation.

Her insurance company gave her one check for personal property; for the structure, checks arrived over time as needed. “Then they wanted to see my W2’s. If I had made one penny from farming, they would have denied the entire claim.”

Homeowners’ vs. Farm Policies

Greg Warren noted that a signed insurance policy is a legal contract that stipulates what will happen after a fire, theft or other problem. His job is to discuss with clients what their exposures are, then set up a policy that will cover those exposures. Often clients respond that they can’t afford a certain premium, so they try to pare back and may end up without sufficient coverage.

Warren noted important differences between a homeowner’s and a farm policy. For most homeowners, the dwelling determines the premium, and other figures are an automatic percentage of that. For example, other structures not attached to the house are 10% of the house value; personal property is automatically 50% of the house value; loss of use is 30 percent. An additional, very small charge is made to cover homeowners for personal liability. “But personal liability is limited,” Warren explained. “A homeowner’s policy is really designed to insure someone who has a house on a small lot and they do nothing else but live there.” So premiums are low and coverage is limited, compared with a farm policy.

Warren’s new clients often have a homeowner’s policy but have a couple of cows in the back yard, grow vegetables and sell some at a farm stand… and previously had an agent saying they were covered. But homeowners’ policies often say that if you’re involved in a business, neither the “other structures” coverage nor the personal liability will address that business. A business includes a trade, profession or occupation. “A lot of companies aren’t going to want to see your tax return to see if you actually filed for an income. There are companies that will… say you’ve got a dozen cows in the back yard and you raise them for beef … that is a trade – even if you trade it for something else. Homeowners’ policies are very limited.” They are affordable ($400 to $500/year). A farm policy may give you the same coverage on a house but cost double or triple the premium on a homeowners’. “So people don’t want to switch because of the cost--but you have to be aware of the limitations on the policy.”

A farm policy has no automatic inclusions. Everything has to be specified regarding coverage. Farm Family, for instance, has five divisions. “We insure everything you’d want to insure in one of those five divisions. You have to choose what you want to insure. If it’s not listed specifically on the policy, there is no coverage. A working relationship with your agent and full disclosure are really important,” said Warren. “A lot of people tend to be private; they don’t want to give you all the information. I need to make sure I’m advising you to have the right coverages so that you don’t have a problem when you have a claim.”

Liability Coverage

“Most people don’t want to talk about Division 5—liability. Liability insurance is one of the most difficult coverages to derive a premium for. With other divisions, you can assign a value to the item.” Property coverage has a rate per thousand, but “with liability, it’s a lot more vague. You can purchase $100,000, $300,000, $500,000 or $1,000,000 coverage on a farm policy, but that isn’t really measurable regarding what’s the likelihood of you having a claim under that division.” Thus, companies often use gross income as a measure. “They see $1 million vs. $100,000 worth of blueberry sales per year. The former has more likelihood of a claim, so [the company] will charge more for his $1 million-dollar policy than it would charge the latter for a $1 million-dollar policy. I have to know all of your sources of income and your gross income from each of those sources for each year.”

Sometimes people don’t want to reveal their income. “A farm policy is designed to insure your farm exposures, but as your insurance agent, I want to know what all of your other exposures are, because I don’t want you assuming something’s included when it’s excluded.” For example, farm liability provides coverage for the sale of raw products, such as raising and selling raw blueberries. “If someone eats them and gets sick and wants to sue, you’re covered.” But if you make and sell blueberry jam, farm liability does not give you product liability for the jam. You need added coverage for product liability of processed products.

Some farmers have gravel pits, Warren continued. “The sale of gravel is not considered a farm exposure. You need a different classification on a general liability policy that gives you coverage for the sale of gravel.”

Not every insurance company covers all exposures, he added. If you have a sawmill on your premise, and people bring you logs to saw into lumber for other people, that cannot be covered under farm liability. “You need to have (and Farm Family will write) a separate, general liability policy for this.

“Farm family will not insure gravel pits, excavation, bull dozing … A farmer with a gravel pit needs to get a general liability policy from another agent.” Suppose your tractor rolls into the gravel pit. If it was being used for farming, it is covered; but if it fell on somebody and hurt them because they were in the gravel pit getting gravel, that would fall under the gravel pit policy. Claims can sometimes be addressed by two different policies, noted Warren.

“One of the biggest things that our company does not want to have happen is a claim coming in and not having it be covered. The negativism surrounding that is anti-sales. Our company wants to make sure that a particular risk has all the coverages that are necessary for any ‘what ifs’ that could come about. Keep in mind that some “what ifs” are excluded, regardless. For example earthquakes, floods, nuclear mishaps, any acts of war.”

Warren explained that percentages are important, as is having full coverage – or, if you’re aware of it, being ok with having only partial coverage. Under personal property coverage – typically 50% of the value of your residence – certain items are limited. A house insured for $200,000 would have $100,000 worth of “replacement cost coverage” for the contents – but within those items, there is a limitation. Only a certain amount will be paid on certain items, such as jewelry or coins, regardless of the amount of insurance you have on your contents. If you own any of these items, and you want them to be insured for their actual value, you need to get them appraised, send the appraisal to the insurance company, and have them listed specifically on your policy. These items fall under Farm Family’s Division 4, Scheduled Personal Property, and incur an additional premium. (This is also true of any homeowner’s policy, not just a farm policy.) The written appraisal must be from someone of authority (such as someone in the coin or jewelry business), but it doesn’t have to be certified.

Replacement Cost vs. Actual Cost Value

Understand replacement cost value versus actual cost value, said Warren – for buildings as well as their contents. “Replacement cost says that we will replace or repair damage that occurs to the structure, minus the deductible.” To calculate replacement costs, Warren goes into the residence, writes down the square footage, the type of construction, the type of finish, walls, floors, ceilings, number of bathrooms, whether they’re custom, standard or elite, then puts these figures into his computer program. For Farm Family, the sales representative’s program is the same as the one its claims people use.

“We come up with a value that it would take to replace it,” said Warren. “Nine times out of 10, that’s what we’ll insure it for, because the client doesn’t really have an idea of what it would take to replace their house. If they don’t agree with it, we’re more than willing to have a contractor do, basically, a bid on what it would take to build the house. If it’s a lot different than our figure, we’ll use it—as long as it’s documented.

“You can either be overinsured or underinsured,” continued Warren. Being overinsured means you’re paying a premium for something on which you can’t collect. “But the degree of being overinsured is a matter of discussion. If you have a house that clearly would take $100,000 to rebuild but you end up insuring it for $125,000, it burns to the ground, a contractor comes along and says it’s only going to cost $100,000 for me to build this back, that’s what we’ll pay: $100,000, even though you’ve paid a premium of $125,000.

“If you’re underinsured – say you insure that house for $85,000 and it burns to the ground and it’s going to take $100,000 to build it back, you’re only going to have $85,000 available, so you’re going to have to come up with the other $15,000.”

The 80% Rule

Consider also the coinsurance clause on items that are being insured for replacement value. This clause says that the amount of insurance you purchase on a building has to be maintained at at least 80% of the actual cost to replace the building. “So if it actually takes $100,000 to replace a structure, and you had it insured for $90,000, you’re within that 80%. We will pay for the cost of replacing it up to the $90,000. But if you had it insured for $75,000, that’s below that 80% requirement. That means that you weren’t insuring it for enough to qualify for replacement costs, so then … you’re insured for the actual cash value, which is the replacement value minus depreciation for age. So it’s important to continually review your policies with your agents, so that as the cost of construction increases, you increase your coverage to stay within the 80%, so that the coinsurance clause does not apply.”

What if your house doesn’t burn to the ground, but burns 40 percent? “Probably this replacement cost and coinsurance clause would be more of a factor in that situation than in a total loss,” said Warren. “Say the house should have been insured for $100,000 and was only insured for $75,000, and you’ve got a $30,000 kitchen fire. They’ll say, it should have been insured for at least $80,000; you insured it for $75,000. $75,000/$80,000 gives a percentage. That percentage will be applied to the loss of $30,000, so you’ll get less than the $30,000 to repair the damage to your kitchen. But if the house replacement value was $100,000 and you had it insured for $100,000 and had a $30,000 kitchen fire, you would get the $30,000 to repair it.”

You can buy an inflation guard rider on a policy that increases the coverage on a building by 4% every year. “For many years I didn’t like that,” Warren noted, “because that increase meant that the amount of coverage on a structure was getting ahead of what it would actually cost to rebuild it. So I often did not recommend that clients have that, but it was important to review the policy periodically so that if you needed to increase the coverage, you could. In the last few years the cost of construction has been going up almost that fast, so in recent years, it probably has been good to have that inflation guard rider. You have to be careful that you aren’t paying for coverage that you can’t claim, because the amount of coverage exceeds the amount that it would take to actually rebuild the structure. It’s a balancing act.”

Farm Family’s claims adjustor figures the cost to rebuild and, at the same time, asks the contractor that the client will use to submit an estimate. “As long as those estimates all seem to be the same, you’re not going to have a problem. But if you have a contractor who comes in and says I’m going to charge you $200,000 to rebuild this house, and the claims adjustor says we can do it for $100,000, that’s a huge difference. They have to start comparing notes to make it realistic.”

When Whitmore-Smithers said that her insurance company didn’t allow such negotiation, Warren recommended that people ask their agents: “Who is the claims person who will handle this claim? If the answer is, ‘I don’t know,’ or ‘We don’t have a claims office; we use independent adjustors,’” question the company. “That means there’s no working relationship from the beginning to the end stages.” Warren said he’s stayed with Farm Family for 18 years partly because of its claims procedure. “We have our own claims office in Augusta. We have our own claims people. If I have a claim, I know what’s going to happen. If there are any doubts, Tom [his claims adjustor] calls me and asks what I have in my file. So there is a continuation from what I do in setting the policy up to the end result of the claim being settled. I think that’s really important in the insurance industry, but I don’t see it being the norm.”

You can get two free, excellent booklets about business insurance and farm insurance from the Maine Department of Professional & Financial Regulation, 34 State House Station, Augusta Me 04333; www.MaineInsuranceReg.org; 1-800-300-5000 (in Maine); 207-624-8475. They are: Insuring Your Business … The Basics of Property & Liability Coverage and Insuring Your Farm … The Basics of Property & Liability Coverage.